How Much Should I Pay an Employee?

Working out how much to pay an employee involves lots of different factors. You’ll need to consider things like legal requirements, market standards, job responsibilities, and the individual’s skills and experience. So where do you start? In this article we’ll explain how to set salaries for your employees.

Why is it important to get employee pay right?

Getting employee pay right is an important part of being a good employer. Everyone wants to be treated fairly, and to feel they’re being paid the appropriate rate for the role they perform in your business.

Setting a competitive salary (and any perks you offer alongside it) is also a valuable recruitment tool, and can help you attract and retain talent. Even if you’re only taking someone on temporarily, such as a temp to help out during busy season, paying them properly (and legally) is still an important consideration – especially if you want to improve your reputation as an employer.

The National Minimum Wage and National Living Wage

Before we get much further, it’s well worth considering the rules around minimum pay. The UK government sets the minimum amount which employers must pay based on an employee’s age.

Any salary or rate of pay you set must not be below the threshold once divided by the number of hours worked to earn that amount. We have a minimum wage calculator which will help you double check!

You should be aware of the differences between the National Living Wage and the National Minimum Wage too.

How do I work out what to pay someone?

The salary you offer should reflect the job role, the skills and experience required, and industry expectations. You might find it useful to look at things like salary surveys, industry reports, and adverts for similar roles; any of these can give insights into the average salaries for this type of job.

Consider things like:

• What the role will involve
• The level of skills, education, and experience needed
• Location
• Affordability

It’s also very important to check whether you already have someone doing the exact same thing – in which case, it might be wise to pay them the same amount!

What does the job involve?

Consider the specific responsibilities and qualifications for the position. More demanding jobs with a lot of responsibility and specialised skills tend to command a higher salary. Similarly, someone with lots of experience and a proven track record will usually need compensating.

Where is the role located?

Geographical location is another important thing to consider. The cost of living can vary widely across the UK, with London generally being higher compared to other regions. Many jobs are also now hybrid, with some days working in the office and some working at home. This can be very attractive to potential employees looking to improve work/life balance.

What can your business afford to pay?

You need to offer an attractive pay and benefits package, but the fact is you’ll always be limited by what your business can actually afford. Looking at things like cash flow and profitability will help you understand what your business can afford for the duration of that person’s contract. You can also compare this to the value you expect them to provide.

Can I pay employees differently for the same job?

No – under UK employment law it’s illegal to pay employees differently for the same job based on things like gender, race, or disability. Employees must receive the same pay and benefits for doing the same or similar jobs, regardless of characteristics protected by law.

Any disparities in pay must be justified by factors such as experience, skills, or performance. Unjustifiable pay differences can have legal consequences, so be careful and take professional advice if you’re not sure. You don’t want to damage staff morale or your reputation.

How much it costs to employ someone

Employment costs go further than paying someone’s wages. On-costs, or the “true” cost of employment, include:

• Making employer’s National Insurance contributions (currently 15% of everything your employee earns above the £5,000 Secondary Threshold)
• Employer’s pension contributions (currently 5%) and other auto-enrolment or workplace pension costs
• Statutory pay such as Statutory Sick Pay and Maternity Pay, plus any discretionary amounts you decide to pay on top
• The cost of arranging cover if needed when someone is off (on top of paid leave your employee is entitled to)
• Equipment, software, licenses, training fees
• Recruitment costs, such as placing adverts or paying a recruiter
• The cost of setting up and administering payroll

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What’s the best way to negotiate an employee’s pay?

Employers and employees often have different points of view when it comes to pay, which makes open communication really important. Any job advert should include a salary (or a realistic range if the final amount is dependent on experience), and the interview is a good opportunity to get a clear understanding of the candidate expectations. Be prepared to discuss each part of the compensation package you’re offering!

Ongoing pay reviews are also essential if you hope to retain your best talent. After all, the job market, economic conditions, and the financial health of the business can change over time, so you might need to make adjustments.

What other benefits could I offer staff?

There are many incentives or staff perks you could offer in addition to an employee’s pay, such as a company car. Other examples can be as varied as discretionary sick pay, health insurance, gym membership, hybrid working, annual staff parties, or provided meals.

They can go a long way towards helping attract the best talent. Yes, there are certain things you must offer to meet your legal obligations as an employer, but if you want the very best team, it’s not just about providing the basics. You may need to get creative!

Just be aware some of these are considered to be taxable Benefits in Kind which will have an impact on the tax your employee pays (and on your employer’s NI contributions).

Help with employment costs

The cost of employing someone can be as much as 30% of an employee’s salary, but there are government and support options which can help manage this, such as:

• Employment Allowance: A type of relief which helps eligible employers reduce their bill for National Insurance by up to £10,500 per tax year
• Other National Insurance relief: Such as relief applied to NI contributions you make when employing armed forces veterans
• Support for recruitment: Jobcentre Plus allows employers to place adverts for free, match to candidates, and interview support
• Building the future workforce: The government also offer things like apprenticeship training funding and the Youth Jobs Grant

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